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China Turns to Services As Engineered Slowdown Weighs on Manufacturing

After acknowledging the "increasing downward pressure" facing their economy last week, China announced a renewed focus on building up the country's services sector in order to shore up any potential manufacturing losses.

China's gross domestic product (GDP) growth slowed to a still-meteoric 8.1% in the first quarter of 2012, down from 8.4% in the fourth quarter of 2011. This has raised concerns about further deceleration in the world's second-largest economy among market watchers, including Premier Wen Jiabao. "Fostering growth in the service sector is the main direction for China's economic transformation and restructuring, as well as an internal call to improve people's living standards," said Wen at the opening ceremony for the first Beijing International Fair for Trade in Service, held this past Monday, May 28.

Despite these efforts to allay market concerns, China's slowdown is taking place by design. The Chinese government set the full-year GDP growth target at 7.5% for 2012, marking the first time in eight years that this target has been under 8%, and the country has made it clear that its efforts, which have been largely successful, are geared toward engineering a soft landing.

Although these efforts are necessary from a sustainability perspective, they've come at a less-than-advantageous time for the global economy at large, and particularly for the manufacturing sector. "The Chinese have continued to try to slow things down," said NACM Economist Chris Kuehl, PhD. "That has reduced their demand for goods from the U.S. as well as from other nations that the U.S. sells to. The export business has been critical for the U.S. manufacturer and it therefore causes some heartburn when those foreign markets seem to stumble."

For this reason, Chinese officials have emphasized the importance of trade in the services sector as a way to drive growth in an environment of weaker demand for Chinese products. "Against the backdrop of intensifying uncertainties and risks of global economic downturns, the development of the service sector and service trade will become the new growth pole for China," said Qiu Hong, assistant commerce minister.

- Jacob Barron, CICP, NACM staff writer

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